Thursday, September 30, 2010

There has been a certain amount of anguished debate in Estonia over the past few weeks over the way that Lithuania has been successfully attracting inward investment and Estonia has not. To a degree the comments from the Estonian establishment are well taken: Lithuania has been better at marketing and at providing incentives that the Estonian government -as a matter of principle- would not.

However, this is not the whole story, and the Estonian government needs to understand the consequences of several critical decisions that have been taken over the course of the past few years. In short, the country is in grave danger of losing its hard won reputation for open and fair dealing with international investors.

The fact is that few of the major international investments in Estonia over the course of the past few years have gone smoothly. The American investment in Estonian Railways ended in acrimony and a more or less forced renationalisation. The American investors were caught between powerful Russian interests which limited their participation in the lucrative Russian freight market. However they also faced challenges from the Estonian political establishment that repeatedly kept trying to alter the terms of the contracts which the Americans had signed in good faith. In part this was perhaps because many Estonian politicians had developed grave doubts about the wisdom of Rail privatisation in the first place, but possibly it was also because they had fundamental misunderstandings about the nature and strategy of the business. The investment ended in a welter of arbitration and litigation, with the American investors more or less accusing the Estonian government of using force majeur against them. At that time, several allegations of corruption were also made against political and state figures in Estonia.

Then there has been the long running saga of Estonian Energy. Again an American company, NRG, contracted to invest in the Estonian power sector after a period of negotiations that lasted over four years. Again, owing to internal political pressures, there were unilateral, material changes to contract terms and again the transaction ended in an acrimonious blizzard of litigation. The business urgently needs new capital, but as the planned IPO has been put off for another year, it could well be argued that many in the Estonian state have not taken their legal commitments seriously enough and that this is causing long term damage to the economy.

Now, yet another large scale international investment in Estonia appears to be receiving the same treatment: Tallinn Water. Up until now Tallinn Water had been considered a model for investment in local infrastructure. The terms of the privatisation were clear and, although the pro forma return on investment was relatively low, United Utilities have made substantial investments in order to bring Tallinn Water up to international standards. Now, however, the company is facing political pressure to restructure and to reduce its prices well below the levels agreed under the formula set at privatisation. Furthermore, the company believes that specific legislation targeting Tallinn Water is being drafted- which it considers to be purely arbitrary. The company has repeatedly requested meetings with state officials and these have been repeatedly denied. The government appears to be dealing with Tallinn Water, as with other investors, on the basis of ultimatum and not negotiation. Putting pressure on investors by creating a kind of Kangaroo court of public opinion is dangerous populism.

In short, given the unfortunate track record of major investments into Estonia it is quite possible that Tallinn Water, like Estonian Railway and Eesti Energia is now facing political pressure which it is powerless to counter-act. The small and clannish nature of much of the Estonian political system can be very opaque to international investors, and more unfortunately still, the Estonian state seems to prefer it that way. A free economy requires a free and open dialogue, but at critical points the Estonians fail -apparently deliberately- to signal their intentions in a way that can be easily understood by investors. On occasion the supporters of free markets have entered into pacts with political figures that severely compromise Estonia as a genuinely fair and open investment market. In short, there have been a number of public allegations of corruption, not least by the investors in Estonian Rail, which prima facie may well be justified.

In the past Estonia has not taken action against well placed individuals who appear to have broken the law. The case of Victor Kaasik, a lawyer who was accused of defrauding his client and who has faced repeated allegations of ethics violations, is one of the more egregious examples. Despite multiple complaints to the Estonian bar association, so far, the case has not been publicly investigated and it seems that, so far, only the lightest of sanctions have been taken. This is widely thought to be because the lawyer enjoys significant political protection. If true, such "protection" should have no place in an open society.

The fundamental basis of a healthy free market economy and democratic politics is trust- and investors have found that they can not always trust the Estonian state not to break or unilaterally alter the contracts that they have entered into, or to properly investigate serious allegations of malpractice. Whether this is the result of corruption, bloody mindedness or just incompetence, it still amounts to the same thing: considerable damage to the country.

That is a very serious problem, and as the political campaign against Tallinn Water enters a new phase, Estonian politicians might recognise that in their bid to court short term popularity by reducing water tariffs they are damaging not only the long term viability of Tallinn Water but they are also destroying their own reputation and that of their country itself. Contracts, once agreed, must not be unilaterally altered to suit changing political whims.

As the rather futile debate over the relative merits of Lithuania versus Estonia as investment destinations continues, Estonian officials should not dismiss the idea that they actually have a genuine problem- and neither should Estonian voters.

Friday, September 24, 2010

As I was passing through the bookshop in Heathrow Terminal 3, I noticed that some wag had placed a copy of Tony Blair's turgid tome The Journey in the "True Crime" section. Seemed about right to me, even the prose is an offence against nature... and as for the sanctimonious waffle, words fail me, and I wished they had him too.

Tuesday, September 21, 2010

The expected media narrative of party splits and challenges to the leadership and the coalition was never going to happen. The party in a special conference in Birmingham just after the election had already agreed to support the Clegg leadership- even knowing that the coalition was going to be at times quite uncomfortable. In fact the ritual leadership defeat, this time on "free schools" was fairly half hearted and, given the government's significant failures of presentation, totally expected. In fact the conference has been marked more by sycophancy to Nick Clegg rather than challenges to his leadership (If I hear "I agree with Nick" once more, I reserve the right to puke).

The news of significant growth in party membership and party coffers is very interesting and rather off-sets the Labour narrative (enthusiastically promoted by the BBC and the Guardian as the conference began) that the Lib Dems face a choice of electoral oblivion or absorption into the Conservatives. That is not the message of local elections either, where the party has been making some important gains. The polls may be down a bit, but given the pretty volatile nature of political support these days, this is an occasion less for panic and more for reflection. After all, in several opinion polls in the General Election campaign, the Lib Dems appeared to be leading, and that turned out to be less than accurate too.

So the party will probably leave Liverpool with something of a spring in its step- and even a boost in the polls. Nevertheless, the future of both the party and the coalition will rest- however unwelcome it will be to say so- on the referendum for electoral reform. I don't much like AV, but this is less about the precise system, and more about winning support for the very idea of electoral reform in the first place. If we can get the voters to support switching to voting in order of preference, then it is a short step to change the number of MPs elected from one to several, that is to say to move to a single transferable vote for multi member constituencies- which is what the Lib Dems actually want. Unless the voters can be persuaded of the need to make some change, then the whole project of political reform is undermined.

The "fundis" in the party who reject AV, must understand that they are also throwing out the prospect of any other change - possibly for decades. The people who voted against the Scotland Act 1979 on the grounds that the powers being offered to the prospective Scottish Parliament by the Callaghan government were "insufficient" were left to wait another two decades before their chance came again. The referendum must pass for the Lib Dems to have a hope for the future- it really is that simple.

So, the conference is important, but perhaps not in quite the way the media hoped. Instead of the public rows of opposition, there is the muted debate of government. Yet the party does face threat: it is in danger of losing touch with the big picture as the minutiae of government preoccupy the ministerial leadership. I was not able to attend the Federal conference this year, but I certainly intend to burnish my friendships with like minded people across the party in order to frame our policy debates more firmly within the root of Liberal ideology- and I certainly hope to be in Perth for the Scottish conference.

The battle for Liberalism remains in doubt- even inside the party that should be the most Liberal of all: the Liberal Democrats.

Monday, September 20, 2010

In the last big recession, at the beginning of the 1980s, Unemployment became a national spectre. News at Ten would intone in doomed tones the details of the latest job losses around the country, and often the numbers of jobs going were truly appalling. Thousands were laid off, and entire towns lost their very reason to exist. This recession, so far, has been different because unemployment has not in fact risen in quite the same way. Given the various changes (read: fiddles) that governments have adopted along the way in order to reduce the official unemployment rate, the numbers might be expected to be lower anyway, but in fact the population of the UK has risen quite sharply over the course of the last thirty years, so even a three million unemployed level would be quite a lot lower as a percentage than three million unemployed was in 1981. In fact we have got nowhere near that level... yet.

The crude statistics hide more than they reveal: public sector employment was about 19.3% of total employment in 1997, and after rising to about 23%, is now between 20% and 21%- again given the large increase in population this masks a significant increase in the actual numbers joining the public sector. It also hides the significant increase in average wages in the public sector, which are now substantially higher than the private sector. It also masks a dramatic fall in the marginal productivity of the public sector. In short the public sector is larger, more expensive and less efficient than it was in 1997. This comes even before we think about the reclassifications that the nationalisation of the banks might make us consider, after all in other countries, the BBC would be considered a state organisation: for the purposes of British statistics, in the UK it is not- and indeed neither are the banks, such as RBS, HBOS, Lloyds, etc. which the state now controls.

In fact the explosion of state indebtedness was already under way well before the banking crisis. But in the face of the pressure of the twin problems of unsustainable deficit and ballooning national debt, it is clear that significant retrenchment is going to have to happen as a matter of urgency.

The irritation that the Liberal Democrat conference has demonstrated to the party leadership over the issue of "cuts", does not obscure the fact that the party understands why such unpleasant decisions are indeed necessary. However, what neither leadership nor activist base is demonstrating is some thought about how to address the issue of unemployment which is going to result.

Partly, at least this is because the Liberal Democrats, like the Conservatives, are still trying to debate the issue of unemployment in the language of Labour clientism. If the problem is "Unemployment" then the solution is "Creating Jobs" as if this was an end in itself. In fact this is Labour state power writ large.

In a free economy in a free country it is important to remember that people are allowed, and indeed should be encouraged to create jobs for themselves. The point of free enterprise is that people seek to do what they always dreamed of doing and to make an honest buck out of it, and not be Proles directed by the state as to what they should do. Entrepreneurs are not just Dyson or Branson, they include anybody who tries to work for themselves in any capacity. Labour imposed so many restrictions (often -quite falsely- blaming the EU for their own absurdities) that it is hard not to conclude that they conducted a pogrom against free enterprise and entrepreneurship. It is a pogrom that is condoned if we accept the New Labour vocabulary on unemployment and job creation.

Liberals have a deeper affinity with small business and entrepreneurship than any other party. Our traditional bedrock was the nonconformist self-made businesspeople of the north and west- where the Liberal tradition survived the bitter drought of the 1940s-60s. It seems to me that we have a chance to reclaim free enterprise as a cardinal Liberal virtue- and Liverpool of all places is where we should be starting this process. Liverpool was founded and built on a spirit of public spirited Non-conformism. The City was laid low by the Socialist response to the decline of the port, which the "creation" of endless jobs- all in the wrong place and in the wrong sector at the behest of the state. If the wealth of Liverpool was founded on civic Liberalism, its ruin was brought about about by civic Socialism.

We are going to face higher unemployment across the Western world. We could make this a burden by taking on yet further millions of jobless and increasingly skill-less workers into the Socialist client state of the "long term unemployed".

Or we could make it a Liberation.

We could foster greater labour flexibility and greater opportunity by encouraging new business and new entrepreneurship. We need to change people's mind sets by promoting the greater opportunity and greater freedom that entrepreneurship can give - at any age. The increasingly obvious crisis in the public sector can now give our country an opportunity for fresh thinking, and top of the list should be eliminating Labour Newspeak when it comes to jobs.

Government jobs are not the panacea for unemployment- creating a more dynamic and freer economy is.

Liberal Democrats should be making the case for greater freedom for entrepreneurs with gusto- before anyone else does.

Friday, September 10, 2010

The constant invasions of the state into affairs that are purely personal is a matter of critical public debate worldwide in these early years of the millennium.

The Chinese state, historically, gave its citizens few if any defences. At the benign extreme, this led to a rather bland social consensus dictated by state approved Neo-Confucianism; at the other, the murderous horrors of the "Great Leap Forward" and the Cultural Revolution. Even at the highest level of the Chinese Communist Party, there is a recognition that the rights of the individual should be given a lot more voice- indeed there is a substantial minority who would now argue that China should be making moves to full democracy.

In the West where what passes for full democracy is already in place, it is clear that the promise of democracy in terms of personal freedom and fulfilment is not being met. The rights of the individual have often been subordinated to the limited private interests- and corporations can often dictate their will to the supposedly democratic organs of state. We must recognise that what we call democracy is in fact a political system where contending groups seek to balance their interests- sometimes even against the interests of society as a whole.

However the key element in the weakening of the West has been the actions of the State itself. This is especially true in economic affairs. The power of the state over matters of employment, personal economic welfare choices, and certain aspects of social behaviour has grown, is growing faster, and needs to be reduced. As technology allows the state to know more even about their deepest thoughts and preferences, it is clear that a new bargain needs to be struck in the West in order to define more clearly where the powers of the state must be limited.

The past decades have seen the emergence of a society where freedom of action of the individual has been generally reduced in order to improve economic security. The problem is that rescuing the poor from impoverishment through the "welfare state" apparatus has ended up so limiting individual freedom, in the field of entrepreneurship for example, that the overall wealth generating capacity of society has fallen to a level where the welfare state itself can not longer be sustained without impossible levels of debt. In this I am not talking so much about a system of progressive or even redistributive tax, but rather the creation of a clientele of individuals and families that do not work at all. I am also talking about the vast numbers of useless or even counter productive restrictive practices- health and safety being only the most obvious example- that prevent individuals from making their own decisions.

The growth of a restrictive, prohibitionist culture is something I totally abhor. In building we have gone from NIMBY-ism- Not in My Back Yard- to BANANA- Build Absolutely Nothing Anywhere Near Anyone. We impose mandatory access to public transport for people of limited mobility at a cost that would allow them to travel at will in their own personal chauffeur driven Rolls Royce- each. We do not consider the cost side of any cost benefit analysis- only that benefits- however minor- should be pursued regardless of cost.

This is essentially decadent. We can not impose our own self indulgence upon the next generations- who most certainly will not be able to maintain the fiction that all things can be afforded. It is not necessarily the case that society need do without many of the positive things that the welfare state may offer, but that these things can no longer be offered by the government. More to the point, maintaining oneself and one's family can not be done at the cost of the rest of society. It is necessary that welfare claimants provide some contribution in return for the benefits that they receive: unemployment is corrosive, and once the discipline of work is lost, it is hard to regain it- as we see on too many sink estates.

We have allowed the ambition of too many individuals to dwindle to their next giro- so it is hardly any wonder that out of boredom and frustration, our barely educated underclass resorts to drink, drugs and violence. By fencing in its citizens - over protecting them- freedom has been diminished to enhance safety.

Those who sell freedom to gain security end up with neither, and that at the economic and social level is what has happened in too many places in the West. The price is an inexorable decline in wealth for the next generations- unless we can wean ourselves off the culture of economic dependency that has been fostered by the misguided good intentions of the current system.

Thursday, September 09, 2010

I am in deepest France- La France Profonde- although my journey here was rather hampered by the usual French strike- in this case Air Traffic Controllers. I was only delayed, but plenty of flights from all over Europe into Toulouse had been cancelled. The ostensible reason for this outbreak of radicalisme was a proposal to raise the retirement age in France to 62. Since the de facto retirement age in the UK is already creeping up towards 67, it is hard to feel much sympathy. As BBC radio was quick to point out a couple of days ago: the French already sleep more, work less hours, have longer holidays, and spend more time eating than any other nation in Europe. You might think that this would be a recipe for health and happiness, but the neuroses of the country remain has angst filled as ever. Also they eat more Macdonalds than the Brits, and to be quite frank the standard fare in a French restaurant is more expensive and far less varied than in the UK- the identikit menus are an exercise in unadventurous boredom.

It is always a shock too to see mediaeval buildings in this country in a state of total disrepair- in the UK, they would have been gussied up to a museum standard, here they rot in genteel and picturesque decay. The recession has had an obvious effect on France- it feels much poorer. even compared to last year, though prices remain steep, especially when considering the devaluation of Sterling over the past couple of years. I notice a far smaller gap between life here and say Poland- this country is certainly not forging ahead.

Then again, another country, the United States, that thinks it is forging ahead is locked in antediluvian scandals. Some idiot who claims to have a direct line to God has decided that burning hundred of copies of the Koran would not be in any way an offensive and stupid thing to do. The fact that so many in the Us are prepared to take this guy seriously suggests that religion rots the brain of too many Americans. The fact they insist on regarding Genesis and demonstrable scientific proof as having equal validity- that the, shall we say allegories, of Genesis are in fact the literal truth and not just a load of made up stuff demonstrates something very unhealthy. Meanwhile the sanctimonious hypocrite masquerading as a preacher in the name of love intends to do something that has started wars in the past. I am not sure that this American activity is much of an improvement on French laziness. In fact the French would probably put this stupid man in a mental hospital, and I can't say that this would be a bad thing.

Meanwhile the Chinese remain on a charge: no laziness and no offensive behaviour to Muslims. The military industrial complex in Beijing has an uber-realist and very hard nosed approach to power. They are now firmly in the driving seat as Europe remains mired in French laziness and the United States continues to be inspired by a demonstrably false religiosity.

Yet the Chinese officer class has embraced a very aggressive nationalism: claiming all of the South China Sea and maximalist territorial claims against India. It is hard not to see this emerging Superpower as being a significant threat to the stability of the international system.

The self indulgence of French radicalism and American religious hypocrisy seem increasingly witless in the face of the aggressive expansionism of the Chinese military. These illusions may have a very short shelf life in the face of the pitiless necessity of facing the rise of authoritarian, undemocratic, unreligious, China.

Tuesday, September 07, 2010

The dread news comes through- conveniently enough just at the beginning of the negotiations for the new year's University funding- the UK has fallen drastically in the number of graduates per capita that it is producing. We are now apparently supposed to be shocked that such countries as Slovakia and Slovenia are now above the UK in the OECD ranking. Well, could it be that this is because these countries have only just joined the OECD, so their statistics are only now being included for the first time? In which case, the UK can certainly expect to be behind Estonia, when they join the OECD early next year, since about 40% of the Estonian population takes some kind of further education or training.

Even if there is a genuine problem, given the propensity, even willingness, of graduates from Slovakia or Poland to come to the UK, does it mean that there has to be any change in the UK-s overall competitiveness? The fact is that the British education system, though not quite such a bastion of Spanish practices and corruption as the United States, is still failing to deliver the right mixture of skills at the right price. It is quite clear that funding in certain sectors needs to be increased, but every time Universities get increases in funding, they tend to distribute it to the cheaper subjects- an awful lot of gender theory in theatre arts and not enough chemistry. Yet to argue with the Universities is to threaten their cherished "academic freedom"- a freedom that gives equal validity to queer studies and physics. If we are not producing engineers, at least the Slovaks are, and we can hire them.

In fact, I am clearly being over flippant- but unless or until either graduates are asked to repay the cost of their education, whether through direct graduate taxation, or some increment of income tax, or- better still- unless the Universities become genuinely independent of state control: especially in the way that they can charge fees, then University places will be rationed by scarcity and not by price.

It ain't pretty, but the choice really is that simple: Ration by price, or ration by scarcity.

Monday, September 06, 2010

Over the past few weeks in the UK we have seen several stories about mistakes being made in tax calculation. These are not just the possible small discrepancies of a few- but a fundamental miscalculation of what is due by the revenue itself 1.4 millions are said to be due to pay more. Yet this morning, it is reported that over 10 million may now qualify for refunds.

Reduced to essentials, it is clear that the tax system is now so complicated that even the revenue themselves can not understand the system.

It is a matter of urgency that the UK simplifies the tax system. Apart from anything else, the mistakes that are being made cost millions, even billions, of Pounds to put right.

There are plenty of models out there, but speaking from an Estonian perspective, the simpler the tax code, and the easier it is to calculate and to pay, then the more tax revenue is raised.

Of course, that then allows the rates of taxation to be lower for any given level of revenue.

Sunday, September 05, 2010

The value of experience in any industry is to identify when something apparently new turns out to be an idea that has been rejected by a previous generation- often for a reason that is fundamental and fundamentally obvious, but which is discounted by a current generation of managers. For some reason, probably because the turnover of staff is so rapid, the City of London seems particularly adept at forgetting some hard learned lessons from the past. Experience in the City takes second fiddle to innovation.

Innovation in finance is part of the fundamental warp and weft of the whole business. It is through innovation that different firms seek to gain a competitive advantage and thus the young whizz-kid, who in most other industries would still be climbing the corporate ladder, in finance commands the highest rewards- including extremely high salaries. Yet, as we have seen from the recent financial crisis, there is a risk in preferring innovation over experience: there are few who dare to challenge the oracle when large profits are at stake.

Yet there is also a cyclicality in the way ideas are revived. Sometimes the phrase "nothing new under the sun" seems specifically devised to cover the way that financial innovation seems to proceed. After all there are actually a fairly limited number of variables to consider: time, price, whether a yield or a capital cost, risk appetite, perceived risk covers most variables. In fact, much of the innovation is designed to cover a different variable: Tax. Many- if not most- of the financial innovations of the past decades have been tax related.

In that sense one could argue that governments are the primary drivers of much that takes place in the financial markets: they regulate and control directly or indirectly, but they also change the instruments in the financial markets according to the capricious whim of their exchequers. Now, of course, many governments are shareholders of the banks that they once sought to control only through regulation. Some politicians- usually those with little or no understanding of the financial markets- have suggested that the lending policies of these now state-owned banks should be adjusted to promote what the politicians proclaim to be the "general well-being of the economy". New or discounted lending to the corporate sector is suggested as being one way out of the economic malaise that the crash has delivered us into.

Yet the fact is that the corporate sector remains deeply unfashionable: in the UK the number of recent graduates entering industrial jobs is dwarfed by the huge numbers who seek to become accountants. Recent investment trends have been far more towards the financial instruments such as bonds- ideally government bonds- that have least to do with exposure to corporate risk. Equity returns have plummeted. Even the most fundamental conventional wisdom: that equities will, over the long term, always outperform debt is now being challenged. Equities are in the doldrums.

To a certain extent, one could explain the out performance of the bond market simply in terms of fear: the risk appetite for equities is low, and investors have been seeking the safe haven of secure bonds- even with a yield that is now in historic terms extremely low. Yet there is one thing that corporates might do to boost their lagging performance, which they have not done. Equities have been priced off the value and stability of their estimated future earnings, and this is mostly given to shareholders in the form of the capital appreciation of their shares. Yet there is an alternative form of compensation, which is of course the annual dividend that shares pay out. The dividend is analogous to the bond coupon, and some investors indeed price their shares based upon a dividend yield. In the difficult economic conditions that we have faced, there is, paradoxically, nervousness about companies that pay out high dividends: since they are perceived to be making themselves vulnerable to market weakness or to takeover, if they do not preserve their capital. However in my view, the mature Western markets -though not emerging markets- should be expecting a much higher dividend yield than they have been getting. The fact is that investors have not been receiving enough cash for their investment in equities.

Now, I suspect, we are coming to yet another inflection point in the market. It is clear that the historically low bond yields will not continue indefinitely. At some point in the relatively near future, the opinions of investors will change: the benign environment of the bond market will become extremely volatile. At that point I think a low leverage corporate with a stable dividend will look dramatically more attractive. A spike in bond yields could cause a dramatic sell-off, and at that point, the prospects of the equity market, once the short-run turmoil is over, will be dramatically improved.

So, if I can just find a financial instrument that will flip me from one asset class to the other at just the right time... yes, you guessed it, financial innovation will continue unabated, and that really is experience talking.

Friday, September 03, 2010

The last six months have seen an extraordinary change in the political direction of Belarus- sometimes known as the "last dictatorship in Europe". Alas, while "Transnistria", Azerbaijan, Armenia and even Russia are considered European, then Belarus' claim to fame is not as unique as all that.

Nevertheless the eccentric rule of Oleksander Lukashenka has continued. His fairly brutal security police continues to be called the KGB, and the flag of the country remains essentially that of the Soviet Republic. Yet, despite the extremely close relationship with Russia, including participating in the "Russian-Belarusian State Union", the country has managed to maintain its independence, despite continuing predictions of full union under the Kremlin. Historically the dictator has been extremely loyal, not to say slavish, to the Russian government.

It is the relationship between Mi'nsk and Moscow that has changed, rather than any great opening up of democracy in Belarus itself. A strange media war has opened up a huge divide between the two erstwhile partners of the Union. Russian media, under the firm control of Mr. Putin lambastes Lukashenka as a tyrant, while in Belarus, the criminal links of the Putin regime have been carefully documented by the local state media. Neither has Belarus played along with the Putinistas' annexation of the Georgian territories of Abhazia and South Ossetia- indeed, to the fury of the Kremlin, a full scale interview with President Saakhasvili was broadcast instead. A fire bomb attack took place this week on the Russian embassy in Mi'nsk- and though it seems clear that the Belarusian authorities were not involved, it has increased the hostility between the two countries to a far greater degree.

On an almost daily basis the Kremlin shows its displeasure with its former close ally. So, what is going on?

On the face of it, the dispute is the same poisonous mixture of Russian economic interests being thwarted combined with the personal contempt of Putin for the country's leader that led up to the crisis in Georgia. Various Russian business interests have been seeking greater control over the oil refining facilities in Belarus for some time, however the combination of competition between different Russian factions and the greater resources available in the West has put the control over the refineries in doubt. As in Lithuania, Russia is finding it very difficult to establish effective control over these downstream facilities. Despite Lukashenka's previous loyalty, he senses that the economic power of Russia is not what it was. In short, despite being full of sound and fury, the Russian Silovikido not appear to have the power or the money to get the level of strategic control that they have demanded. Meanwhile, Lukashenka has discovered the value of playing the West off against Russia.

The interesting side effect has been that despite the continued detention of several political prisoners, many in the Belarusian opposition are privately saying that Lukashenka is now the bulwark of Belarusian independence against the Russians. Compromises that they would have barely considered are being actively discussed.

Lukashenka seems to be doing the impossible: he is getting the opposition to rally around his own- incompetent and brutal- regime as the better alternative to a Russian puppet state.

Belarus is not losing its capacity to surprise- and neither is Oleksander Lukashenka.

Somalia is one of the most benighted places on the planet. Staggeringly violent, desperately poor, it regularly comes last in any ranking of the nations of the Earth. Since the collapse of the Somali state, nearly twenty years ago, the country has become a extremely dangerous anarchy. The capital Mogadishu, once known as the Pearl of the Indian Ocean, now stands in ruins.

Somalia is the number one example of a failed state. It has no government.

In the face of this breakdown, it is worth considering that the state of Somalia, created in 1960, rests on two historic foundations: the former colonies of Italian Somalia and British Somaliland. Under the repressive regime of Said Barre, the two were forced into one. The fall of his regime, and the subsequent collapse of the state led to the emergence of a separate government in the former British Somaliland.

It is by no means a utopian state: it remains extremely poor and undeveloped. However, compared to the rest of former Somalia, Somaliland is a beacon of order, prosperity and even to some degree, of freedom. The territory- unrecognised by any other as an independent state- has managed to create a better life for its population than Somalia ever did. The disorder, violence and piracy that are the chief characteristics of Somalia do not disfigure the more tranquil Somaliland. Peaceful government and peaceful transfers of power have become the norm in the Somaliland capital, Hargeysa. Yet the emerging country can not draw on any assistance from overseas: it remains unrecognised. This excludes the desperately poor Somalilanders from any aid or assistance programmes, and it is also an increasing threat to the hard won peace and stability of the country.

The neighbouring area of former Somalia, Puntland, does not accept the borders that Somaliland has claimed for itself, and there is now increasingly conflict as the Puntland Somalis attempt to settle the border dispute by force. Somaliland can not seek arbitration- it remains unrecognised- and the dispute risks returning Somaliland to the anarchy of the rest of former Somalia, from which it had made a hard won escape.

The African Union, as a matter of policy, does not recognise "breakaway" states- they argue that there are so many border disputes and secessionist movements on the dark continent that to recognise one risks inflaming further many other disputes. Yet Somaliland is different. The creation of the state of Somalia in 1960 was not the granting of independence to a single colony: it was the creation of a new territory and a new state. Given the clearly expressed democratic will of Somaliland to leave the state of Somalia, and to return to the situation that pertained before 1960, it seems entirely just that they should be allowed to do so, and that this should now be recognised by the international community.

The Horn of Africa is a wretched part of the world, but the failure to recognise the reality and the right of the independence of Somaliland is causing even more damage. Recognition will allow Somaliland to seek security for its borders and to open up trade and economic development in its own right.

Given the history of British involvement in the region, it seems only fair that the United Kingdom should now seek to raise the case of Somaliland both with the African Union, and also with the United Nations. If the legal problems of a unilateral recognition can not be addressed immediately, then perhaps Britain should actively sponsor the engagement of Somaliland with the Commonwealth where the Somalilanders are seeking to gain at least observer membership.

Pretending that the rights of the Somalilanders are subsidiary to the wider conflict in former Somalia is condemning an already poor people to continuing poverty, and forbidding them to escape that poverty through their own efforts: this is frankly immoral. Obeying some discredited international legal quibbles should not take priority over the freely expressed wishes and democratic rights of the people of Somaliland.

Wednesday, September 01, 2010

Tony Blair's enemies are legion. Many express themselves forcibly: he is a "political shape shifter", "unprincipled or deluded", "master of lies and spin", "the ultimate hypocrite". Gideon Rachman in yesterday's FT, suggests that the hatred of Blair is overdone, and that eventually a more balanced view will emerge.

Perhaps this may be true about some of his policies in office, but the huge mistakes that Blair made are obvious to even an unbiased observer. The half baked version of devolution that Labour offered will cause us constitutional problems for years to come. Even what Blair regards as his greatest success, the Northern Ireland peace process, was largely the work of Mo Mowlam, and even that -which he was so quick to claim the credit for- remains dangerously incomplete. The huge increase in government expenditure that he presided over led us to a national financial crisis, and his "reforms" of the NHS drastically increased costs, with very little benefit in outcomes.

The "target culture" he developed from foundations laid by John Major twisted the state: the quality of work was subordinated to arbitrary - even random- performance measurement. With no executive experience, the Blair government floundered, and the mistakes that were made continue to haunt us even today .

Worse still, there was the conduct of government. Lies, presentation, and spin dictated policy. Announcements were repeated with dizzying rapidity, until the only sane response to any given government target was a cynical laugh. The lasting political and economic legacy of Blair is unlikely to be seen as a positive one. The huge surge of hope that greeted his election ended in bitterness, anger and disgust.

The naked egos and personal ambition we now see exposed in the members of the Blair cabinet reveals an extraordinary bunch of inadequates and losers. John Prescott- so obviously out of his depth- was a bulimic womaniser. Gordon Brown, a warped and strange neurotic, Mandelson a narcissistic, greedy bully- the Flashman of the Blair cabinet. The list of the failings of the faintly pathetic spooks who presumed to rule the United Kingdom for over a decade is extraordinary.

At the heart of this dysfunctional system stood Blair himself. A true hypocrite- since he took communion unofficially as a Catholic without tackling the official constitutional barriers to Catholics- his dishonest relationship to God permeated his whole Premiership. So certain in his invincible arrogance, he led the UK into an avoidable war which killed over 100,000 Iraqis and so many of our own service people. The benefits of the war were questionable at best. The costs- including radicalised Islam on our own doorstep- continue to this day. Many regard this policy decision- the very crux of his entire leadership- as a criminal act of folly, and that is a judgement that colours all the rest.

Yet whatever the rights and wrongs of Blair's conduct in office, it his his conduct since he left that has roused the British people to an contemptuous fury. Since leaving office, Mr. Blair has helped himself to whatever was going. In the process he has created a property portfolio that alone is said to be worth over £15 million- not bad for a man, who even as Prime Minister, earned little more than £150,000 a year. Even factoring in the wealth that his wife's lucrative legal practice has brought to the family, it is clear that since his retirement, Mr. Blair has cashed in his status as a former Prime Minister to the maximum extent possible. Not for Tony and Cherie, the rather more ascetic existence of Ex-President Carter, for example.

It is this that has truly infuriated the British people. By donating the expected £4 million proceeds of his memoirs to charity, he simply underlines that he can afford to do so: he is indeed that rich. He has become rich because he was Prime Minister: a job of public service, not private profit. Given the respect and support that ex Prime Ministers usually have been given by the establishment, the extraordinary, naked greed shown by the Blairs' now makes it very difficult to think about them- in office or beyond it- without a red mist descending.

Then there is the new Labour leadership contest. The soap opera of brother against brother. The interventions from the Blair-Brown-Mandelson generation have been deprecated by all the contestants: as well they might. The fact is that the ghosts of the Blair-Brown years- when all but Diane Abbot achieved high office- are a toxic legacy. They are all the creatures of the airless world of Labour spin and hype. They all cut their political teeth in a party where presentation mattered far, far more than policy- and are genuinely surprised when you point this out as a negative.

The drawing room world of the Hampstead Marxist has little to do with the political realities of the United Kingdom as it struggles to avoid continued decline and economic irrelevance. It really doesn't matter which of the wretched Milliband brothers inherits the Labour leadership. It is a poisoned chalice.

The Labour Party has not yet been truly punished for the political disasters of Blair and Brown.

The complacency that the leadership contest demonstrates- the candidates genuinely believe that the coalition will fold up its tents and Labour will return within a matter of a couple of years or so- also demonstrates why Labour may yet lose the way in their search for power.

The public backlash against Blair may yet damage Labour in ways they do not yet seem, even dimly, to understand.